Today’s tumultuous economy and changing consumer attitudes make the life insurance purchase decision challenging. Both term (temporary) coverage and permanent coverage have their relative advantages and disadvantages. Here, in brief are the choices:

Term Life? This provides an affordable entry point, but  coverage is temporary. The cost of insurance increases over time as the insured’s life expectancy decreases, eventually making coverage less affordable.

Permanent Life?  Permanent policy options can be complex and confusing:

• Whole Life provides protection to at least age 100, but tends to be more expensive, difficult to understand, and inflexible.
• Variable Life allows for improved cash value potential, but exposes the buyer to market risk.
• Universal Life is interest sensitive, and policies purchased during high interest rate periods  suffered adverse performance as rates declined.

What Consumers Want: Control, Clarity and Value

Given all these choices, how can consumers decide which product is best suited to their own needs, circumstances and priorities?

A recent study by LIMRA and LIFE Foundation  can help shed some light on consumer priorities. While individual circumstances will vary, the study shows that general consumer insurance buying patterns and  priorities have changed over the past 15 years.

The study’s  findings strongly suggest that life insurance shoppers, influenced largely by the internet, tend to seek these 3 things:

1. Control/Flexibility

• 26% say they prefer to purchase life insurance by internet, mail or phone.
• 64% still prefer to buy from an insurance or financial professional face to face (although this is down from 80% in 1996.)

2. Clarity/Simplicity

When asked what factors matter most to them in buying insurance, consumers cited:

• #1: Understanding what they’re buying (36%.)
• #2: Obtaining the proper coverage amount (22%.)

3. Affordability/Value

Although the cost of basic term life has fallen by about 50% over the past 10 years, consumers are still concerned about the price of coverage:

• Cost is the top reason people give for not owning enough life insurance.
• Men place value getting the best price more than women: 17% vs 11%.

And in the wake of the 2008 recession and the weak recovery, there is also increased sensitivity to risk and volatility, making the stability of guarantees more important.

How Guaranteed Universal Life Fits In

Responsive life insurance companies are addressing consumer demand for control, simplicity and value with a new generation of guaranteed Universal Life policies.  These new products are designed to meet consumers’ needs while overcoming the challenges that the older generation of Universal Life policies encountered. Here’s how:

1. Clarity/Simplicity: Universal Life (UL) is based on a comparatively simple and transparent design (as illustrated below). It provides a clever way to combining term life insurance with a saving plan:

• a portion of your premium pays for the cost of insurance.
• a portion is reserved as cash value that can be used in the future to reduce the cost of insurance and provide cash when you need it.

2. Control/Flexibility:

When times are hard, the cash accumulation fund provides a cushion that can allow you to skip premium payments, and when times are good, there is flexibility to increase your premium payments to enhance that savings element. You can decide how much of your premium dollars go to savings to generate more significant cash values that accrue tax deferred and can be used for contingencies such as:

• Unpaid medical bills – Few people anticipate the need for additional money during a prolonged illness. Cash value in the policy can be withdrawn, or borrowed, to pay medical bills.
• Higher education – College funds are built over a sustained period of disciplined saving. While funds are not accessible in the early years of the policy, cash values are available when children are ready for college.
• Retirement supplement – Additional income during the retirement years can be helpful when other sources are not available.

It is possible to arrange to pay a premium for a certain number of years only – such as 10 or 15 years while still guaranteeing lifetime coverage. UL policies also allow for a choice among death benefit options: a Level Death Benefit, in which premiums and interest primarily increase the cash value, or Increasing Death Benefit, in which they are also used to increase the death benefit over time.

3. Affordability/Value: UL provides cost control and value in the following ways:

• Affordability: While more expensive than term life insurance, UL is less expensive than whole life insurance.
• Value: Guaranteed Universal Life (GUL) provides the value of guarantees, so that both the coverage and premium level will last to a certain age regardless of current interest or economic conditions. In response to increased life expectancy, some policies provide coverage up to age 121. Policies also provide a guaranteed minimum cash value.

Buying Life Insurance is About More than Price

Under the right circumstances, Universal Life Insurance can provide permanent coverage that stays in force as long as the premiums are paid or beyond. Proper management of the savings component enables the funds to grow tax deferred at a steady rate until the money is needed. Additional standard or optional benefit features provide additional value and flexibility, including:

• Self Completion: an optional Waiver of Premium benefit will waive the premium payments in the event of disability, allowing the policy to stay in force.
• Accelerated Death Benefit: This standard benefit enables the policy holder to receive cash advances against the death benefit if diagnosed with a terminal illness.
• Partial Surrender Benefit: This standard feature lets you take a portion of your cash value out of the policy instead of surrendering the entire policy for the full value, lowering the death benefit by the amount you withdraw.

In today’s volatile economic environment, changing consumer attitudes and priorities have created a need for simple, transparent, affordable, flexible products that provide solid guarantees. Unlike the older Universal Life products that were sold when interest rates were high and lost value as rates declined, today’s Guaranteed Universal Life products have been designed to provide sound guarantees during a time of low interest crediting rates. And with interest rates at their current historic lows, there’s room for future growth over time.

For consumers who are seeking affordable, customizable permanent coverage, it may be time to take a fresh look at Universal Life.

You’re a financially successful grandparent who wants to leave a big legacy for your grandchildren. You would like to maximize the legacy you leave them while minimizing taxes. Here are some questions you’ll need to consider:

Q. Will the Generation Skipping Transfer Tax (GSTT) limit what I can give to my children?

The IRS imposes a transfer tax at each family generation:

• If an asset passes from a parent to a child, and then from the child to a grandchild, estate tax is imposed in both the parent’s and the child’s estates.
• If a parent passes the asset to the grandchild to try to bypass the child’s estate and avoid estate tax,  it may be subject to another transfer tax, the generation-skipping transfer tax.
• This tax is particularly onerous because it is imposed in addition to the estate tax incurred in the parent’s estate and is assessed at a flat 45% rate.

As a result, when the GSTT applies, it may result in more than 75% of the assets passing to the grandchild being consumed in estate taxes and generation-skipping taxes.

Q. At what amount does the tax kick in?

The IRS provides each individual with a “GST exemption” of $5.25 million. In other words, each individual may engage in generation-skipping transfers of up to that amount without subjecting those assets to the GSTT.

Q. Can I leave even more without losing much to taxes?

Many individuals who might otherwise leave their entire estates to their children allocate their generation-skipping exemption – currently $5.25 million – to generation skipping trusts for the benefit of their children and grandchildren.

Q. Would a trust help if I don’t have that many assets?

The trust advantages go beyond tax savings. Using the generation-skipping tax exemption offers two important advantages:

• The trust will escape all transfer taxes when the children die and will pass to the grandchildren tax-free.
• The trust may be protected from the claims of creditors and, to some degree ex-spouses. (some states protect inheritance in divorce proceedings.)
• Gift, estate and generation skipping tax laws are constantly changing. The exemption amount has been as low as $1 million and the tax, as high as 55%.

Historical Generation Skipping Transfer Tax Exemptions and Rates

Q. How Do I Set Up a GSTT Trust?

1. Establish a trust. Appoint a trustee

2. Fund it up to the GSTT exemption.

3. Leverage the trust assets through life insurance.

The example below provides a brief summary of what a Dynasty trust can do for you. Please note that states may limit the term of the trust:

Leverage Your Legacy

If you and your spouse are healthy and qualify for life insurance, the trustee can also purchase life insurance on you. The advantages:

• The death proceeds go to your children and grandchildren, exactly according to your wishes.
• The proceeds are generally received by the trust both income and estate tax free.
• You can provide for multiple generations – including both children and grandchildren.

Speak With a Planner

Estate and GST taxes can be avoided using other useful techniques. For example, interests in a family limited partnership (FLP) or family limited liability company (FLLC) can be transferred to succeeding generations by simply gifting the assets to family members. Valuation discounting of family business interests can lower exposure to gift taxes. Under circumstances, a personal residence can be efficiently transferred using a qualified personal residence trust (QPRT). These other techniques, however, do not offer the asset protection and long-term wealth preservation and management possible with an irrevocable dynasty trust.

Takeaways

• The uncertainty of tax laws means that any grandparent with assets over $1 million should consider funding an irrevocable dynasty trust to take advantage of the current $5.2 million gift and GST tax exemptions.
• Grandparents with $1 million or less should consider placing high-growth assets in a dynasty trust, where they can grow insulated against creditors and against future estate taxes.
• If you are healthy enough to qualify for life insurance, it can greatly multiply the amount that you leave to future generations.

Note: 2013 Changes to Estate Tax, Gift Tax, and Generation-Skipping Transfer Tax Laws

Under ATRA, the federal estate tax exemption has been indexed for inflation and  increased from $5.12 million in 2012 to $5.25 million in 2013, but the estate tax rate for estates valued over this amount has increased from 35% in 2012 to 40% in 2013. In addition, the lifetime gift tax exemption has also been indexed for inflation and increased from $5.12 million in 2012 to $5.25 million in 2013, and the maximum gift tax rate has increased from 35% in 2012 to 40% in 2013. The generation skipping transfer tax exemption has also been indexed for inflation and  increased from $5.12 million in 2012 to $5.25 million in 2013, and the maximum generation skipping transfer tax rate has increased from 35% in 2012 to 40% in 2013.

Warning & Disclaimer: This is not legal advice.

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April 2013: Gold dropped to its lowest level in two years – on top of a 10% fall over the past six months.

Gold was supposed to be a secure investment in an uncertain time – so much so that an April 2011 Gallup poll found that 34% of Americans thought that gold was the best long-term investment, more than another other investment category.

Then,  two years after its price reached a new high, it plunged to its lowest level in over two years, falling 19% since late 2011. This is the greatest decline in 33 years, amid record-high trading.

According to the New York Times, the crash of a golden decade of rising prices caught many investors by surprise. Morningstar reports that $5 billion  had flowed into gold-focused mutual funds between 2009 and 2010, bringing those funds to a peak value of $26.3 billion in April 2011. These funds lost half of their value:

It is a remarkable turnabout for an investment that many have long regarded as one of the safest of all. The decline has been so swift that some Wall Street analysts are declaring the end of a golden age of gold. The stakes are high: the last time the metal went through a patch like this, in the 1980s, its price took 30 years to recover.

In a time of plunging global interest rates, why did investors flock to a traditional  inflation hedge?  Why were they willing to buy at such high prices? It seems that many investors mistook gold for a product that could provide them significant protection against economic risk – more in line with an insurance product.

What’s A Safe Investment?

It’s certainly understandable that people would seek a safe haven at a time when many are losing faith in their political and economic systems. However,  given that there are few safe investments to turn to considering the low returns that interest-bearing products have been offering, the allure of gold was perhaps understandable:

Investopedia’s “4 Safest Investments Right Now” - which includes TIPS, I-Bonds, Short Term Bond Funds, and Bank CDs –  have such modest returns that they essentially just aim to preserve principal. Investopedia states:

Any one of these options represents a low-risk low-return solution to preserving principal. You won’t earn much in returns with these securities though. In most cases it will be just enough to keep level with inflation. If you need capital appreciation over the long term, you’ll have to take on more risk.

A Different Approach to Wealth Preservation

One financial vehicle that has recently been enjoying a resurgence of interest is permanent life insurance.  

2012 was a very big year for permanent life insurance sales according to research and consulting firm LIMRA, :

• Total individual life insurance new annualized premium grew 6% — the third straight year of growth.
• Total individual life premium grew 12% in the fourth quarter — the largest growth recorded since the downturn.
• Life insurance policies sold grew 1%  — the second consecutive year of positive annual policy growth.

Example: The chart shows a 65-year-old man who purchases of a policy with a $1,000,000 death benefit for a $26,000 annual premium. In the year of his life expectancy the adjusted Internal Rate of Return (IRR) of his death benefit is 5.88%, or, since he is not taxed, 8.17%.

If he passes away earlier, his IRR will be higher – as high as 108.28% at age 79.  

• In other words, you don’t have to be a big saver to leave a substantial legacy to your beneficiaries. The death benefit paid to your beneficiaries can be many times what you paid into it.

Short on Glitter – Long on Performance

NewLink Consulting, Toronto found: 29% of U.S. life policyholders lost contact with the agent/financial planner who had sold them the policy, and 41% if the policy was purchased from an agent/broker.

Guest blogger Mark Weishaar

An orphan can be defined as “One who lacks support, supervision or care”.
How many do you have in your CRM database? How many customers have simply become dormant and shuffled into an inactive or unassigned category?

In a recent conversation with my client from a major life insurance carrier, I was appalled to learn that her company had well over 100,000 orphaned policyholders. In insurance-speak, these are folks who originally purchased a policy from an agent, but were never re-assigned after that agent left the company.

Many industries have a similar category in their database. Inactive bank accounts, infrequent flyers, one-time visitors… the list goes on. It gets me thinking: how many organizations could use a shot in the bottom-line? This category represents a huge untapped asset:

1. Orphans are never contacted. You have forgotten about them, and they have forgotten about you. How likely are they to ever upgrade or buy another product or service from you? 
2. If your competition is effectively marketing – and you know they are – how many competing offers can your orphans resist? Retention rates suffer when customers are ignored. 

The ROI of Marketing to Orphaned Policyholders

Let’s put some dollars and sense behind a simple illustration exercise: 

With the potential for this scope of increased revenue, it makes no sense to me that so many insurance companies do not devote any attention to their orphaned policyholders. Political turf issues over account re-assignment? Possibly. “Don’t rock the boat” and “Let sleeping clients lie” mentality? Maybe. Inertia? Most likely. 

Case Study: A short while back, I worked with a major hotel chain to develop a multi-pronged marketing campaign. Our objective was to revitalize their “dormant” clients: those who had not booked a room within the previous 24 months. Of the many successful initiatives we launched, the highlight was going back to the dormant customers.

After modeling their data against the frequent guests and re-soliciting a predictive-modeled group with an offer, we generated an ROI of 1,090%!

Unheard of? Yes. But true. And I could predict similar successes in your own organization.

So take a look at your entire customer file. Find those pockets of orphaned customers who have been ignored for whatever reason. Develop a strategy to solicit them with a product offering using a predictive model-driven approach. The incremental revenue generation and low acquisition costs are likely to amaze you, and will demonstrate once again the truism that:

Your Best Customer is Your Current Customer.

Employers are struggling with employee benefit decisions.

In addition to the challenging economic  and competitive environment, employers now face three key difficulties

:

• healthcare reform, 
• precipitously rising benefit costs,  and 
• a less loyal workforce.  

The conundrum employers face is that employee loyalty has been steadily declining, while employees are demanding benefits more.  The ninth annual MetLife Study of Employee Benefits Trends, respectively, showed that employees reported:

• a 12% decline in “strong loyalty” to employers from 2008 to 2011.

• Avoids complicated reporting and nondiscrimination requirements, giving employers control over whom to reward. 
• Costs and benefits can be split among employer and employees to fit the needs of the business. 
• Employers can control the incentives by designing their plan with or without “strings.” 

Here are 3 popular ways that employer-sponsored life insurance benefits are  offered to select key employees

1. Split-dollar – for Cost and Benefit Sharing

Benefits: The costs and benefits of a policy are shared between the employer and a select key employee.

During employment: The employer and a select key employee each pay an agreed percentage of the premium.  This could be called a “consumer-directed plan” because it allows the employer to provide an executive with a life insurance benefit with low outlay.

At death: A tax-free death benefit is paid to the employee’s beneficiary,  and a portion goes to the employer to recoup it’s contributions.

At separation from service:  the policy’s cash value may reimburse the employer for his share of the premiums and allow the employee to purchase and keep the policy.

According to National Underwriter, this  continues to be a vital and popular planning tool.

Anticipated Results: Costs and benefits can be split according to the employer’s needs. The “rollout” of the benefit to the employee upon separation of service can be used to tie the employee to the company for a long period, encouraging loyalty and retention.

April 10, 2013–

This past week, I had the unique opportunity to attend and hear Daniel Kahneman discuss his best-selling book, Thinking, Fast and Slow, during a speaking engagement that took place at a Barnes and Noble Bookstore in New York City. Many of you may be familiar with the Nobel Prize-winning psychologist and his ground-breaking work with Prospect Theory and behavioral economics. His most recent book addresses two modes of human thought: the quick, emotional kind and the pondering, logical type. In the book, Kahneman shares his views around several heuristics and biases from anchoring to framing to, of course, loss aversion. But during his discussion at this New York City event, it wasn’t what was written in the book that captured my attention as more the learning lessons he conveyed from his own life experiences.

While there were several fascinating anecdotes Daniel shared with the audience that night, there are two points I found of particular interest and unexpected. One is what he believes captured the attention of the public in his early studies of psychology and second is what he feels is an error in our society with the pursuit of measuring happiness.

How do you challenge rationality in the face of hardline economists?

The moderator asked Mr. Kahneman about the early impact of his work and why others experienced such a profound curiosity in his field. Kahneman attributes the interest in his research and behavioral economics as a direct result of HOW the study was published in Science magazine many years ago and perhaps not as much on the content.

The way we presented on the theory was by having questions in the body of the text…which means the reader can appreciate their own reaction to the question as they [experience] making the errors something that they experience [too]…it’s the fact that they are prone to make errors and they come to recognize it. It is a personal experience and a personal response. This [written] work had more impact than most other psychological work at the time because there is hardly any other psychology studies [published] that will generate from the reader of your paper a personal experience that validates what you are conveying.

We thought we were writing in a fun way to write, but it turned out to be the key to the impact of the theory.

Unbeknownst to Kahneman was the profound concept of “framing” in the way he conveyed his own research—the simplicity of introducing a study in terms of dialogue.  Is this not where we find the field of marketing today?  We once categorized marketing as either a push or pull strategy, but it has been replaced by the conversation age, which has proven to be far more impactful when it comes to building relationships with customers (or in Daniel’s case, interest in his readers). Think about marketing today and your own personal experiences; it’s all about dialogue. Tell me one company in one industry that does not have a social media plan in place seeking to engage consumers in a conversation.

Stop Focusing on Happiness

The second revelation during Kahneman’s discussion was his view on using measures of happiness as an alternative to economic measures on societal progress. He sees a fundamental issue with regard to how we spend a great deal of time, energy and money on the pursuit of happiness.

I think the focus on happiness is misguided and I think the focus on happiness in part is an accident of language. We measure length and not shortness, we measure depth and not shallowness, and we only see in dimensions that are marked on the one side we are thinking of. We should be measuring suffering. And we should act as a society to reduce suffering… I am much less concerned about happiness and [in favor of] reducing human suffering.

Based on the round of applause he received in response, I think the general audience would tend to agree. Kahneman expressed these thoughts on the coattails of how society would reap greater benefits if we put more effort toward such an endeavor. I cannot help but put on my own behavioral finance spin on these sentiments. I believe that many people exclaim that they are in the pursuit of wealth (which they may equate with happiness and what money can buy), but maybe all they really want is not to be poor (and avoid financial suffering and the inability to acquire essential needs)?

Of course this is a leading question, but hey, the idea is to be engaging, enrich the conversation, and hopefully have others share their personal views.

 Joel L. Franks is a Behavioral Finance and Financial Marketing Professional. His background in behavioral economics and his extensive experience in banking, brokerage and insurance has enabled him to combine both the science and the art of creating innovative marketing strategy, create positive customer experiences and the ability to sell more product, to more people, more often.

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